Annual Privatization Report 2005 – Offshore Outsourcing

Annual Privatization Report

Annual Privatization Report 2005 – Offshore Outsourcing

Offshore Outsourcing

Industries wishing to save money by subcontracting some of their work to foreign companies, a practice known as “offshore outsourcing,” are hitting more walls than ever. Even outsourcing to American companies in different states is hitting roadblocks. In recent years, state and federal legislators have proposed over 200 pieces of anti-outsourcing legislation. The National Foundation for American Policy notes that lawmakers have actually picked up the pace of anti-outsourcing bill-writing. Legislators have introduced more anti-outsourcing bills in the first three months of 2005 than they did in all of 2004.

Governors in Alaska, Massachusetts, Michigan, Minnesota, New Jersey, and North Carolina have issued executive orders designed to restrict outsourcing, and recently seven states passed laws designed to discourage the practice.1

Table 4: State-level Anti-Outsourcing Laws
State Effect of law
Alabama Encourages state and local entities to use in-state services. Does not restrict or place mandates on procurement decisions.
Colorado State agencies can contract for personal services performed outside the United States if it is clearly demonstrated that there will be no reduction in the quality of services and contracts contain confidentiality and right to privacy safeguards.
Indiana Preferences between 1 and 5 percent for Indiana companies in the awarding of state contracts.
New Jersey Prohibits state contracts to be performed by anyone other than U.S. citizens or those authorized to work in the United States.
North Carolina Preference for in-state or U.S. products and services within bounds of federal law provided that there is no loss of price or quality.
Tennessee Preference for U.S. contractors in state contracts for the provision of data entry and/or call center services.
Missouri Preference to in-state providers for state contracts.

Source: National Foundation for American Policy, Star Ledger

Since January 2004, some 40 states had considered various anti-outsourcing bills. Nearly all would do one of the following:

  • Ban foreign or out-of-state bidders from competing for state contracts.
  • Give preferences to U.S. or in-state contractors competing for state projects.
  • Impose restrictions on certain fields, such as call centers.

Several pieces of federal legislation would mirror state-level proposals by placing restrictions on government contracting, but federal legislation would have more impact on private-sector outsourcing. Certain bills would, for example:

  • Alter the tax code in an attempt to discourage outsourcing.
  • Place restrictions on those seeking foreign visas.

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How Widespread is Government Offshoring?

Legislators’ attention to government offshoring may seem especially curious since the practice is especially rare. Though growing, the amount of private-sector offshore outsourcing is still quite small. Government-sector offshore outsourcing is smaller still.

Although precise figures are hard to come by, offshore outsourcing by the federal government has increased in recent years, from $6.4 billion worth of service contracting in 1999 to $10.6 billion in 2003.2 Yet offshore outsourcing has remained a small portion (about 6 percent) of total federal government outsourcing.

It is even more difficult to assign a dollar figure to the amount of offshore outsourcing done by state governments, largely because the practice is so uncommon. For example, an analysis by the California State Auditor concluded that the available evidence suggests “the state is spending little on services performed offshore.”3 An anti-outsourcing group recently documented roughly $75 million worth of government work sent overseas by the 50 state legislatures.4 Although the report was intended to stir fears about the rise of offshore outsourcing, it actually revealed how infrequently states make use of the practice. Seventy-five million dollars may seem like a huge amount of money, but state and local governments contract for over $100 billion in services, so offshore outsourcing does not even amount to one-one hundredth of a percent of government outsourcing.

And yet, much like the private-sector variety, the outcry over government outsourcing has been grossly disproportionate to its actual occurrence. Most of the anti-outsourcing bills under consideration take aim at the tiny amount of offshoring done by states, thus much effort is devoted to a very small part of actual operations.

In some cases states have offshored services, only to bring them back after getting stung by bad publicity. Last year, North Carolina legislators voted to spend $1.2 million to bring 34 child support call center jobs back from India. Perhaps the case that received the most attention was New Jersey’s decision to bring back a dozen call center jobs that had gone overseas, a move that cost taxpayers $100,000 per job. Indiana’s cancellation of a $15 million contract was probably even more costly.5 The cancelled bid was $8.1 million less than the next closest competitor, and by one estimate, state taxpayers paid $162,000 for each of the roughly 50 jobs “saved.”6

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Should Government Provide Jobs or Services?

Can we give government two conflicting goals-providing services and providing jobs-and expect both to be done equally well? At some point one goal must be compromised to benefit the other. The more a government operates as a jobs program, the more leery it will grow toward efficiency improvements. And unlike a wasteful private company that hurts only itself by sinking into bankruptcy, a wasteful government just keeps sinking, dragging others down with it.

Instead of charging taxpayers $162,000 for each job brought back from India, Indiana could have spent tens of thousands in severance pay and job training for each outsourced worker. The state could have used the savings for higher priority issues, returned the savings to taxpayers, or devised some combination of the two.

Citing the outrage the Defense Department provoked when it sought to purchase black berets from China, a Commerce Department official notes how the controversy surrounding offshore outsourcing can compromise a department’s core mission:

Lawmakers were incensed that U.S. tax dollars in the Defense Department, of all places, were not being used to support American manufacturers, and the hats were procured from a domestic supplier. Yet unfortunately this question is a bit more complicated. Since even the Defense Department faces a ceiling on its budget, Defense planners are forced to make tough decisions every day. Every dollar spent on clothing is a dollar less for improving soldier’s pay (to keep military families off food stamps), supporting forward deployments, designing new defense systems to better protect our men and women in harm’s way, and improving the accuracy of our precision-guided munitions to minimize noncombatant casualties.7

Kansas lawmakers were initially so outraged by a plan that would send food stamp call center jobs overseas, that they moved to ban it. Once they learned the ban would make providing the service 40 percent more costly, they discarded it. The governors of Maryland and Massachusetts vetoed anti-outsourcing bills passed by their legislatures in 2004, and Governor Schwarzenegger did the same in California when he shot down five such bills.8 And yet the anti-outsourcing bills keep coming. Five more emerged in California, and nationwide well over 100 were written in just the first three months of 2005. Since most are still under consideration, we are now entering a crucial period, one that will likely determine the direction of American policy for many years to come.

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1 The National Foundation for American Policy tracks outsourcing legislation at:

2 United States Government Accountability Office, International Trade: Current Government Data Provide Limited Insight into Offshoring of Services, pp. 30-31.

3 California State Auditor, “The State’s Offshore Contracting: Uncertainty Exists About its Prevalence and Effects,” January 2005,

4 Ed Frauenheim, “Study: States doing plenty of offshoring,” CNET, July 14, 2004.

5 Kevin Corcoran, “State ends deal with Indian firm,” The Indianapolis Star, November 21, 2003.

6 Stuart Anderson, Creeping Protectionism: An Analysis of State and Federal Global Sourcing Legislation (Arlington, Virginia: National Foundation for American Policy, December 2003), p.6.

7 Remarks by Bruce P. Mehlman, Assistant Secretary for Technology Policy, United States Department of Commerce, “Offshore Outsourcing and the Future of American Competitiveness,” Presented before ITA ISAC-13 Advisory Committee, Washington, D.C., October 14, 2003.

8 Summary of States with New/Proposed Laws Restricting Outsourcing (Arlington, Virginia: National Foundation for American Policy, 2004),

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